The Coffee Table Economics (CTE) with Anchor note by Casey Sprake is distributed intermittently. It is a collection of Casey’s thoughts and perspectives on key economic factors, socio-political events, and the multiple dynamics shaping markets globally and in South Africa (SA).
Executive summary
In this week’s edition, we highlight the following:
- The great debt divide: The contrasting dynamics between emerging and developed markets. Debt plays a crucial role in shaping the economic landscapes of developed (DMs) and emerging markets (EMs), but the dynamics of how it operates in these two spheres differ significantly. Examining these areas in more detail reveals the unique challenges and opportunities in both DMs and EMs.
- SA’s inflation slows to a three-year low: Amid a streak of positive developments for South Africans, August inflation, as measured by the Consumer Price Index (CPI), revealed a continuation of the disinflationary trend, with headline inflation decelerating further to 4.4% YoY from 4.6% YoY in July. In the near term, we continue to see a dip in headline inflation, with it remaining below 4% into 1Q25, supported by the stronger exchange rate and lower oil prices.
- Sweet relief: The SARB finally commences a much-anticipated easing cycle. Against this disinflationary backdrop, as expected, the SA Reserve Bank’s (SARB) Monetary Policy Committee (MPC) decided to reduce the repo policy rate by 25 bps to 8% p.a., with the prime lending rate now sitting at 11.5%. One key point from the latest SARB MPC statement is that its forecast sees rates moving towards neutral next year, stabilising slightly above 7%. This confirms our base case of 100-125 bps of cuts this cycle.
The great debt divide: The contrasting dynamics between emerging and developed markets
In the previous edition of Coffee Table Economics, dated 18 September, we discussed how, according to the latest data from the Institute of International Finance (IIF), global debt reached a new record in 1Q24, adding US$1.3trn in just three months to a total of US$315trn. While rising global debt has risks, it can play a critical role in economic development and crisis recovery when managed carefully and used for growth-enhancing purposes. As such, debt plays a crucial role in shaping the economic landscapes of both DMs and EMs, but the dynamics of how it operates in these two spheres differ significantly. This divergence stems from differences in economic maturity, risk profiles, and institutional frameworks. These variations are evident across multiple sectors, including sovereign debt, corporate debt, the financial sector, household debt, and external debt. Examining these areas in more detail reveals the unique challenges and opportunities in both DMs and EMs.
In DMs, sovereign debt levels are high but manageable due to stable institutions and central banks that issue debt in domestic currencies. Countries like the US benefit from lower borrowing costs and greater policy flexibility. In contrast, EMs face more volatile debt dynamics, often borrowing in foreign currencies, which increases their vulnerability to currency depreciation and higher interest rates. Political instability and external shocks exacerbate these challenges. With regard to corporate debt, DM corporations enjoy lower borrowing costs and greater access to capital — sectors such as technology and healthcare leverage debt for expansion and innovation. EM companies, however, face higher risks due to currency mismatches and volatile financial conditions. Industries like commodities and manufacturing are particularly vulnerable to global price swings and trade dynamics. The financial sectors in DMs are well-regulated, with central banks providing liquidity support during crises. Banks operate with high leverage but maintain stability through strong regulatory frameworks. In EMs, banks are more susceptible to currency risks, sovereign defaults, and regulatory shortcomings, leading to greater financial volatility.
On the other hand, households typically carry higher debt levels in DMs, mainly through mortgages and consumer credit, as low interest rates support them. However, rising rates naturally pose their own level of risk. In EMs, household debt is lower but growing rapidly. Increased access to credit boosts consumption, but income volatility makes households more vulnerable during downturns. A final area of significant divergence is external debt, particularly currency risks. In DMs, external debt is usually issued in the country’s currency, reducing the risk of currency mismatches. For example, the US can issue US dollar-denominated external debt, which means that it does not risk a currency crisis affecting its ability to repay its debt.
Additionally, DMs benefit from large, liquid capital markets, allowing them to refinance their debt relatively easily, reducing the risk of default. EMs, however, face significant risks from currency mismatches. A large portion of external debt in these economies is denominated in foreign currencies, particularly US dollars. This exposes them to exchange rate risk – if the local currency depreciates against the dollar, the cost of servicing debt rises sharply. This can lead to debt crises, as seen in Argentina, where recurring currency devaluations have contributed to repeated debt defaults. Furthermore, EMs often face higher refinancing risks, as access to global capital markets can be limited during periods of instability, making it difficult for these economies to roll over or refinance existing debt.
The bottom line
Fundamental differences in economic structure, risk profiles, and institutional frameworks shape debt dynamics in DMs and EMs. DMs benefit from lower borrowing costs, stable financial systems, and access to deep capital markets, allowing them to manage higher debt levels across various sectors. In contrast, EMs face greater volatility, currency risks, and higher borrowing costs, which make debt more difficult to manage. Sectoral differences within these markets further highlight the complexities of debt dynamics, with corporate debt, financial sector stability, and household borrowing all playing crucial roles in shaping the economic outlook of these regions. Understanding these dynamics is essential for investors, policymakers, and analysts seeking to navigate the complexities of global debt markets.
SA’s inflation slows to a three-year low
Amid a streak of positive developments for South Africans, August inflation, as measured by the CPI, revealed a continuation of the disinflationary trend, with headline inflation decelerating further to 4.4% YoY from 4.6% YoY in July. In addition, the print came in slightly below consensus economists’ expectations and is the lowest inflation rate since April 2021, when it also printed at 4.4%. The easing of price pressures appears widespread, with a notable slowdown in energy prices, which fell from 12.1% YoY in the previous month to 11.5%. However, inflationary pressures persist in certain areas, as seen in the slight uptick in categories such as food and alcoholic beverages and tobacco products. Core inflation, which excludes the more volatile food and energy prices and serves as a key indicator of underlying price pressures, moderated to 4.1% YoY in August, down from July’s 4.3% YoY print. This marks the lowest level for core inflation since May 2022 and points to a continued easing in inflation pressures.
The broad-based moderation in core inflation was partly driven by a decrease in housing utilities, which dropped to 4.8% YoY from 5.3% YoY in July. The decline was primarily due to lower inflation in water and other services. Additional relief in core inflation came from household contents and equipment. Car purchases also contributed to the slowdown, and restaurants and hotels experienced a second consecutive month of deceleration. These trends in core components reflect the strain on household finances and weak demand in the economy. A stronger rand exchange rate likely reduced the pass-through of imported inflation, while improved electricity availability may have lessened the impact of infrastructure costs. Additionally, logistics pass-through is likely subdued, given the low-demand environment.
All transport-related products saw softer annual rates in August. Fuel prices continued their downward trend, falling for a third consecutive month. The fuel index dropped by 0.5% MoM, lowering the annual rate to 1.8%. The average price for a litre of diesel in August was R23.23, compared to R23.35 in July. Transport’s impact on overall inflation has diminished since mid-2022, when it was the main driver of rising living costs, accounting for 44% of overall inflation in July of that year. By August 2024, transport’s contribution had fallen to 9%, with housing & utilities and food & non-alcoholic beverages (NAB) taking the lead. Housing & utilities made up a quarter of the total inflation rate in August. Meanwhile, after an eight-month decline, annual food & NAB inflation rose to 4.7% in August from 4.5% in July, putting upward pressure on the headline inflation rate. Most food categories saw higher annual rates, including bread & cereals, meat, fish, milk, eggs & cheese, oils & fats, and vegetables. In contrast, lower rates were recorded for fruit, sugar, sweets & desserts, and hot and cold beverages.
The bottom line:
Looking ahead, high interest rates are suppressing demand and slowing core inflation, particularly for core goods, which helps to mitigate exchange rate risks. Retailers are hesitant to pass on costs due to weak consumer demand. While fuel inflation remains a concern amid tensions in the Middle East, a stronger rand provides some relief. Food price risks are heightened by climate change, but the effects of El Niño are expected to peak soon and then ease. As such, we believe this progress will be sustained, with inflation contained below the 4.5% midpoint of the SARB’s target range through the medium to longer term. In the near term, we continue to see a dip in headline inflation, with it remaining below 4% into 1Q25, supported by the stronger exchange rate and lower oil prices.
Sweet relief: The SARB finally commences a much-anticipated easing cycle
Against this disinflationary backdrop, as expected, the SARB’s MPC decided to lower the repo policy rate by 25 bps to 8% p.a., with the prime lending rate now at 11.5%. In deliberating the policy stance, the MPC weighed three options – leaving rates unchanged, a 25-bp cut, and a more aggressive 50-bp cut. Ultimately, the committee reached a consensus on a 25-bp reduction, concluding that a slightly less restrictive stance aligned with the goal of achieving sustainably lower inflation over the medium term. This decision reinforced our long-held view that the MPC would avoid a sharp 50-bp cut, as the SARB typically favours gradual reductions to maintain market stability and predictability. This cautious approach reflects the SARB’s commitment to managing expectations and avoiding sudden market shocks. The central bank can adjust based on evolving economic conditions by opting for a data-dependent, incremental strategy. This method minimises the risks associated with large, rapid cuts, such as heightened market volatility or misaligned signals. It also ensures smoother transitions in financial markets, allowing for a more measured and adaptive response to inflationary pressures and economic performance.
Looking ahead, one key point from the latest SARB MPC statement is that its forecast sees rates moving towards neutral next year, stabilising slightly above 7%. This confirms our base case of 100-125 bps of cuts this cycle. It is worth noting that the SARB’s Quarterly Projection Model (QPM) previously saw the repo rate ending at 7.25% but now signals a further 25-bp cut in 2025/2026. This will take the repo rate to a steady state of 7%, which aligns with our stated base case. Regarding market reaction, the specific timing or structure of these rate cuts seems relatively unimportant. Assuming the full magnitude of the reductions is ultimately delivered, markets are likely to respond in a relatively neutral manner, similar to Thursday’s (19 September) reaction after the MPC announcement. This suggests that investors are more focused on the overall trajectory of monetary policy rather than the nuances of individual rate decisions.
The bottom line
If the central bank stays on course with its broader policy goals, markets will maintain stability with limited volatility. Predictability and clarity are key in this context, as they help prevent abrupt shifts in sentiment or sharp market adjustments. Markets tend to price in anticipated moves well in advance, which dampens the impact of specific rate cut announcements if they align with expectations. Therefore, provided that the overall policy direction remains clear and consistent, timing becomes less of a factor in driving market responses.
